The market has been reeling in the last two weeks after President Trump announced a new round of 10% tariffs on $300 billion worth of Chinese goods originally set to go into effect on September 1.
In response, China devalued the yuan and halted imports of agricultural products from the U.S. in a move that Cowen said escalated the trade war to a new level. “On a scale of 1-10, it’s an 11,” they said.
Then this week, Trump blinked, allowing the United States Trade Representative to delay the new tariffs until December 15 in an effort to support the holiday shopping season in what many consider to be an acknowledgment that the tariffs are hurting U.S. consumers.
Still, a truce to the trade war seems further away than ever, and fears are growing around the risk of recession brought on in part by the trade war.
But Goldman Sachs (NYSE: GS) just issued a new strategy to get through the trade war pain: buy stocks that are service providers and avoid goods-producing companies.
“Services stocks have less exposure to trade conflict given they have lower foreign input costs that might be subject to tariffs and lower non-U.S. sales than Goods firms,” Goldman’s chief U.S. equity strategist, David Kostin, wrote in a note to clients.
Kostin said services stocks like Facebook (NASDAQ: FB) and Verizon (NYSE: VZ) see faster sales and earnings growth as well as more stable margins than goods-producing companies. Services stocks as a group have also outperformed goods firms by 530 basis points so far this year, Kostin noted.
“Stronger services inflation should also benefit those firms relative to Goods firms. However, the relative valuation of Services vs Goods is slightly elevated vs history,” Kostin continued.
Goldman also included Berkshire Hathaway (NYSE: BRK.A, BRK.B) and Walmart (NYSE: WMT) in its services stocks basket, while also identifying the software, and media and entertainment sectors as the top industries for services stocks.
Kostin also said last week that the firm is focusing on domestic companies with its clients as the trade war rages on. Goldman’s domestic sales basket of 50 stocks with the highest domestic revenue exposure includes names like insurer Allstate (NYSE: ALL), health insurer Anthem (NYSE: ANTM), and grocery giant Kroger (NYSE: KR).
The firm isn’t expecting a trade deal before the 2020 election, and lowered its fourth-quarter growth forecast late Sunday to 1.8% as the trade war is having a greater impact than expected.